Employer-related college scholarship procedures approved

Plain-English summary

A private foundation proposed nonrenewable college scholarships for children of employees of a company and its subsidiaries. An outside organization would administer the program and independently select recipients from students who reached a highly selective level in a national academic competition. Eligibility would not depend on a parent's position or continued employment, and the scholarships could not be used to recruit employees. The IRS found that the program satisfied the facts-and-circumstances test in Revenue Procedure 76-47 because the probability of reaching the qualifying competition level was extremely low. It approved the procedures under section 4945(g)(1), so grants made under them would not be taxable expenditures.

Ruling snapshot

• Question: Did the employer-related scholarship program for employees' children satisfy the advance-approval rules?
• Outcome: Approved.
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), and 4945(g)(1); Rev. Proc. 76-47.

Full text (IRS public release)

Transcriber's note: this document is a five-page scan. All page images were checked. Obvious OCR errors were corrected, repeated page numbers and form footers were omitted, and blank identifying fields remain blank. Original wording is preserved.

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201906015
Release Date: 2/8/2019
Employer Identification Number:

Date: November 14, 2018
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

B = Name
C = Name
D = Individual
E = Name
F = Name
G = Test
H = Individual

w = Number
x dollars = Amount

Dear

You asked for advance approval of your employer-related scholarship grant procedures
under Internal Revenue Code Section 4945(g). This approval is required because you
are a private foundation that is exempt from federal income tax. You requested approval
of your scholarship program to fund the education of certain qualifying students.

Our determination

We approved your procedures for awarding employer-related scholarships. Based on the
information you submitted, and assuming you will conduct your program as proposed, we
determined that your procedures for awarding employer-related scholarships meet the
requirements of Code Section 4945(g)(1). As a result, expenditures you make under
these procedures won't be taxable.

Also, awards made under these procedures are scholarship or fellowship grants and are
not taxable to the recipients if they use them for qualified tuition and related expenses
(subject to the limitations provided in Code Section 117(b)).

Description of your request

Your letter indicates you will annually sponsor up to w nonrenewable scholarships for
children of employees of B and its subsidiaries through C scholarship program in the
amount of x dollars. Recipients must use their scholarships only to pay educational costs
at an undergraduate institution that meets the requirements of Section 170(b)(1)(A)(ii) of
the Code. To be eligible to receive a scholarship, applicants must:

• Be high school students who are children of employees of B who attain D status
under F.

• Enter college in the fall term following their selection and enroll as a full-time
undergraduate in a college or university in the United States that holds accredited
status with a regional accrediting commission on higher education.

• Attend college during the day, enroll in a course of study leading to one of the
traditional baccalaureate degrees, and remain in good academic and disciplinary
standing.

In addition, scholarships are not payable for attendance at service academies, virtual
universities, and certain institutions that are limited in their purposes or training.

Under your program, you enter into an agreement with E to sponsor a specified number
of college scholarships for children of employees of B. E administers all aspects of the
program and bears all administrative costs. Specifically, E selects individual scholarship
recipients through F. The initial phase of F is G, which is given annually in participating
high schools by high school officials. Those students scoring within the top one-half of
one percent on a state-by-state basis are designated as H; they may advance to the level
of D by confirming their scores on a second test, and by submitting an application form
that includes a high school record (provided by their high school officials) showing strong
academic performance, a personal essay, extra-curricular accomplishments and the
recommendation of their high school principal or school official designated by the
principal.

E is responsible for selecting students from among those children of employees of B who
attained the level of D in F to receive scholarships sponsored by you. Specifically, all
scholarship recipients are selected by an independent selection committee from E in its
sole discretion. Furthermore, the probability of attaining the level of D through F (and
therefore becoming eligible for a scholarship) is extremely low. If fewer than w attain D
level, E will reduce the number of awards accordingly. If in the extremely unlikely event
there are more than w students who attain D level, E will increase the number of awards
accordingly.

Furthermore, E is responsible for confirming the individual scholarship recipient’s
enrollment at a college or university in the United States that holds accredited status with
a regional accrediting commission of higher education; making payment of the award
through the financial aid office of the educational institution; and supervising and
investigating the use of the scholarships by the recipients in their educational program. In
addition, recipients of scholarships you sponsor may accept other awards of financial
assistance without affecting your one-time award.

You meet the provisions of Revenue Procedure 76-47. For example, your scholarships
are not used as a means of inducement to recruit employees. A student’s eligibility is
determined at the time the scholarship award is offered and a scholarship will not be
terminated if the student's parent subsequently terminates employment. The student's
eligibility may not be conditioned on any other employment-related factors, such as the
parent’s position, service or duties. The prior employment period for establishing eligibility
may not exceed three years. Your procedures for awarding scholarships to students
designated as D through F are considered to satisfy the “facts and circumstances” test of
Rev. Proc. 76-47 because the probability of attaining D level through F (and therefore
becoming eligible for a scholarship) is extremely low.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Code Section 4945). A taxable expenditure is any amount a private foundation pays as a
grant to an individual for travel, study, or other similar purposes. However, a grant that
meets all of the following requirements of Code Section 4945(g) is not a taxable
expenditure.

• The grant is awarded on an objective and nondiscriminatory basis.
• The IRS approves in advance the procedure for awarding the grant.
• The grant is a scholarship or fellowship subject to Code Section 117(a).
• The grant is to be used for study at an educational organization described in Code
Section 170(b)(1)(A)(ii).

Revenue Procedure 76-47, 1976-2 C.B. 670, provides guidelines to determine whether
grants a private foundation makes under an employer-related program to employees or
children of employees are scholarship or fellowship grants subject to the provisions of
Code Section 117(a). If the program satisfies the seven conditions in Sections 4.01
through 4.07 of Revenue Procedure 76-47 and meets the applicable percentage tests
described in Section 4.08 of Revenue Procedure 76-47, we will assume the grants are
subject to the provisions of Code Section 117(a).

If a private foundation's program satisfies the seven conditions set forth in Sections 4.01
through 4.07 below, but does not meet the percentage test of Section 4.08 applicable to
grants to employees' children or to grants to employees, as the case may be, the
question whether the grants, awarded to individuals in the category (children or
employees) in respect of which the percentage test was not met, are scholarships or
fellowship grants subject to the provisions of Section 117(a) of the Code will be
determined on the basis of all the facts and circumstances.

Your procedures for awarding scholarships to students designated as D through F are
considered to satisfy the “facts and circumstances” test of Rev. Proc. 76-47 because the
probability of attaining D level through F (and therefore becoming eligible for a
scholarship) is extremely low.
You further represented that your procedures for awarding grants will meet the
requirements of Revenue Procedure 76-47:

• An independent selection committee whose members are separate from you, your
creator, and the employer will select individual grant recipients.
• You will not use grants to recruit employees nor will you end a grant if the
employee leaves the employer.
• You will not limit the recipient to a course of study that would particularly benefit
you or the employer.

Other conditions that apply to this determination:

• This determination only covers the grant program described above. This approval
will apply to succeeding grant programs only if their standards and procedures
don’t differ significantly from those described in your original request.

• This determination is in effect as long as your procedures comply with Sections
4.01 through 4.07 of Revenue Procedure 76-47 and with either of the percentage
tests of Section 4.08 and/or the facts and circumstances test. If you establish
another program covering the same individuals, that program must also meet the
applicable tests.

• This determination applies only to you. It may not be cited as a precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You must report any significant changes to your program to
the Cincinnati Office of Exempt Organizations at:

Internal Revenue Service
Exempt Organizations Determinations
P.O. Box 2508
Cincinnati, OH 45201

• You cannot award grants to your creators, officers, directors, trustees, foundation
managers, or members of selection committees or their relatives.

• All funds distributed to individuals must be made on a charitable basis and further
the purposes of your organization. You cannot award grants for a purpose that is
inconsistent with Code Section 170(c)(2)(B).

• You should keep adequate records and case histories so that you can substantiate
your grant distributions with the IRS if necessary.

Please keep a copy of this letter in your records.

We have sent a copy of this letter to your representative as indicated in your power of
attorney.

If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements